The United States is awash in venture capital and private equity dollars, a clear indication that investor demand for startups remains as strong as ever. But supply is increasingly falling behind demand.
Overall business creation today remains far below levels before the Great Recession, according to the U.S. Census Bureau. In addition, new companies with the best chances of becoming job creating businesses have flattened out around 310,000 a quarter as of first quarter 2017, compared to 350,000 to 400,000 a quarter a decade ago, the agency said earlier this year.
“Overall, business applications that have relatively high likelihood of turning into job creators have not fully recovered after the Great Recession, and their quarterly volume is still far below its pre-recession levels,” the Census Bureau report said. “There is recovery in the quantity but not so much in the quality of business applications.”
So not only we are creating fewer companies but also fewer high quality ones. The two statements are related: the more companies we create, the greater the chance some will succeed.
Here are 3 ways we can boost the number of startups:
Encourage more university startups The United States boasts top notch research institutions, including universities and colleges, that often produce intellectual property that can be converted into companies, a process known as tech transfer.
But aside from Stanford and MIT, few schools know how to do tech transfer well. One problem is that several schools want to impose excessive control over people who invent IP on campus or outsiders who want to build companies around it. In Minnesota, where I worked for a decade, the University of Minnesota and especially the Mayo Clinic had reputations for being particularly unfriendly to entrepreneurs.
Judging from the numbers, schools seem more interested at winning patents and generating licensing income than starting companies. In 2016, the most recent available data, universities launched 1,012 companies, just 1.1 percent more than the previous year, according to data from the Association of University Technology Managers. By comparison, patents increased 5.1 percent while licensing income jumped 17.5 percent. Starting a company is no doubt difficult. But given the tens of billions of federal research dollars universities receive each year, we should be getting more bang for our buck.
Universities are sitting on a sizable stash of IP; we must find out better ways to unlock it. Schools can help boost entrepreneurship by streamlining their tech transfer programs to make it easier for people to start businesses, even if that means they give up some financial control. And schools should encourage students from all disciplines, not just science and engineering, to create companies.
Create a safety net for the 1099 workforce Some people argued that the emergence of the Gig Economy would boost entrepreneurship. Working for on demand car or food delivery services would give people a flexible schedule to start companies while earning some cash on the side, the thinking went.
There hasn’t been a lot of research on this topic but one study undermines the theory. A recent paper from the University of Minnesota’s Carlson School of Management found that over a 36-month period, the number of Kickstarter projects on average fell 14 percent once a major ride hailing company entered the market. That translates into a drop of $7.5 million in funding requests.
Instead of performing gig work part time, the study suggests that people are devoting most of their time to on demand work and focusing less on starting companies.
“On the one hand, gig-economy employment might provide individuals with flexibility and resources that enable them to engage in the creation of a new venture, thus increasing total entrepreneurial activity,” the study said. “On the other, the presence of gig-economy platforms may provide a desirable employment alternative for would-be necessity-based entrepreneurs, thus reducing total entrepreneurial activity.” In expensive places like San Francisco and New York, people might find it hard to start businesses because they can’t support themselves just on part time gig income. One solution is to offer these 1099 employees (the tax form contract workers file is called a 1099) a security net of sorts so they can feel more confident to start a business.
Steven Hill, a former Director of the Political Reform Program at the New America Foundation, offered two ideas in his book “Raw Deal.” The first is something called a multiemployer plan in which companies that frequently hire 1099 workers pay into a fund to help pay for their health care costs. Companies could also contribute to Individual Security Accounts, in which employers would pay into each worker’s account a pro-rated amount to subsidize benefits like paid sick days, vacation and holidays, based on the number of hours people worked or a percentage of gross wages.
Providing some kind of cushion for 1099 workers might encourage them to pursue that business idea instead of working on demand jobs full time to make ends meet.
Reduce student loan debt for Millennials In 1996, people between the ages of 20 and 34 accounted for 34.3 percent of entrepreneurs, the largest of any age group, according to the Kauffman Foundation. Nearly two decades later, that number fell 9.3 percentage points to 25 percent.
And despite years of social and economic progress, women have also seen their share of entrepreneurs decline during this period.
One possible big reason: student loan debt.
Outstanding student loan debt currently stands at $1.5 trillion, with 20 percent of loans in default. Nearly two thirds of that debt belong to women, according to the Association of American University Women.
The Brookings Institute earlier this year released a report that concludes escalating costs of higher education has forced students to take out even bigger loans over the years. In 1990, fewer than 5 percent of borrowers had loan balances above $25,000 and almost no borrowers had loan volumes above $100,000. By 2015, more than 40 percent of borrowers had balances above $25,000 and more than 5 percent of borrowers had loan balances above $100,000.
The impact on entrepreneurialism seems clear. Faced with such debt, you’re probably more likely to get a job to pay off those loans than start a business that might pile on more debt.
Should Congress provide some relief to these borrowers, that could make it easier for people to start companies. Perhaps the federal government would agree to forgive some loans should a person launches a business that employs x amount of workers over x period of time.
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